Is Global Sourcing Losing Its Luster?
A frenetic pace of growth has led to inflation, labor shortages and upward wage pressure in developing countries of Asia that diminish their attraction as outsourcing destinations. A recent survey by the American Chamber of Commerce Shanghai and Booz Allen Hamilton, “China Manufacturing Competitiveness 2007-2008,” found that 17% of companies surveyed have plans to move manufacturing from China to other countries due to rising labor costs. India is not considered a good alternative because of infrastructure and labor force issues. Vietnam looks better, but …
An article in the April 2, 2008 Wall Street Journal reported 21,000 Vietnamese workers going on strike against a Taiwanese-owned factory, seeking higher wages and better working conditions as that country battles inflation running around 19%. In any case, Vietnam’s 85 million population is about 6% of China’s, so they can handle only so much of the out-outsourcing.
Asia’s labor bargains lose still more luster when you factor in the shrinking U.S. dollar. Speaking of which: Earlier this year my family hosted a relative from Poland who was visiting the U.S. for the first time. We were knocked for a loop by the fact that he wanted to spend time shopping for clothes to bring back to his wife and children because they were so much cheaper here. What a turnaround from the ultra-cheap vacation I enjoyed when visiting Poland earlier in this decade - before the Poles joined the E.U. and adopted its currency.
It’s both good and bad news that this proud American caught a dose of Third World humility. Bad, because it’s unsettling to see the almighty dollar fall so far so fast. Good, because it sets the stage for a comeback. The weak dollar guarantees more exports and domestic competitiveness, which boosts our economy, which over time should reinvigorate our currency.
Global inflationary pressures will lead to higher costs in the U.S. as well as everywhere else, but it’s the labor cost differential that is the main selling point for Asian outsourcing, and our production costs are unlikely to spiral upward as fast here as there. Almost everything else associated with industrial production - logistics, liability, scheduling, laws, communications, human relations and various extraneous expenses - are at a deficit when products get made in distant foreign lands. It takes a huge labor cost differential to make up for all the disadvantages, and so far that’s been the case. Inflation or not, Chinese factory workers still earn less than a tenth of their North American counterparts, and the Vietnamese lag even farther behind.
The gaps are narrowing, however. Even before the global outsourcing craze, U.S. factory workers were losing jobs and seeing wages lag due to automation. As Asian labor costs rise, U.S. factory workers may become slightly more competitive, but the real boost will be to U.S. manufacturing robotics. In 1942, 25 million people in this country worked in manufacturing. Today the number is around 13 million. Yet, about half the people produce three times the output of the 1942 workforce. Despite all the blather about America’s decline as an industrial power, we still are the global leader by far in manufacturing output, due to modern machinery.
Chinese and Vietnamese manufacturers may give way to even cheaper labor sources that turn up in underdeveloped Third World nations like Bangladesh, or perhaps Cuba if our Caribbean neighbor ever unshackles from its dysfunctional socialist utopia. Yet the most decrepit countries around the globe lack the infrastructure to take advantage of their human resources and suffer from either political instability or all- too-stable lunatic regimes.
These trends make it arguable that the global sourcing craze may have peaked for U.S. manufacturers and distributors. This could spell trouble for many private labels. A few may survive because they have achieved some brand recognition in their markets, but most have been marketed primarily as competitive-grade products. It will be hard to maintain that status while still providing the kind of margins that make it attractive for distributors to go through all the hassles of bringing them in from afar.
Some interesting times lay ahead for our industry’s traditional channel of distribution. U.S. manufacturers may be about to regain some of the clout they have lost over the last couple of decades.